7. The Charities Board told us that since their inception
they have distributed resources on a "population weighted
by deprivation" basis for each country, and for each region
within England. Following the 1998 Act they had introduced special
targeting where there were significant needs but few applications.
They had moved to a more proactive stance, for example in Glasgow
which, with areas of very significant deprivation, had been producing
fewer applications than Edinburgh. They had set up a separate
office in Glasgow and provided a series of helper sessions, and
as a result were now making more grants in that area.[9]

8. In Wales the Charities Board had looked at the
deprivation indicators and the amount of money distributed per
head of population, and decided to concentrate their outreach
work on Flintshire, Newport, Bridgend, Caerphilly and Blaenau
Gwent. A publicity campaign had been mounted and meetings had
been held with officers of the relevant Local Voluntary Councils.
The Charities Board had delivered a series of seminars in these
areas, providing advice on the Board's funding policies, and how
to make an effective application. They hoped that this effort
would, over time, result in more good quality applications from
these target areas.[10]

9. Asked about their relationship with local government,
the Charities Board told us that from the outset they had consulted
the various local government organisations about the scope and
focus of their programmes. Their Regional Managers had been in
regular discussion with the Chief Executives of the local authorities
about the volume of bids in an area or about the particular needs
and pressures. Asked why they were the only lottery organisation
which did not inform local authorities of applications for grants
from organisations within their areas, the Board said that the
independent voluntary sector were keen that their bids were looked
at independently and on merit. The Board added that the sheer
volume of schemes, at three or four times that of any other lottery
distributor, would have caused logistical difficulty in consulting
local authorities. They acknowledged, however, that where a local
authority knew the local circumstances it could assist in focussing
on needs within the area, and told us that they had arranged joint
seminars with local authorities, open days and helper sessions.[11]

10. In Scotland the Charities Board had run an experimental
scheme under which they had consulted the local authorities on
individual applications recommended for grant over £100,000.
However, the experience had not been particularly positive. It
had not led to a change in the decisions on applications, and
the process had become a further bureaucratic burden on local
authority officers. All parties had agreed that it would be beneficial
to move away from consultation on individual applications and
concentrate instead on strategic and community planning considerations,
and dissemination of the Board's priorities. The Board were in
discussion with the Scottish Council for Voluntary Organisations
and the Convention of Scottish Local Authorities about the implementation
of this review.[12]

11. We put it to the Charities Board that some groups
come from deprived areas and cannot afford to use an accountant
or solicitor, and asked whether the complexities of the application
process and monitoring procedure had deterred groups from applying.
The Board recognised that it was sometimes more difficult for
these groups to put together the original application and that
large sophisticated organisations had a greater capacity to fine-tune
their applications. However, on the whole their experience had
been that small locally based groups had proved remarkably innovative
and imaginative, and 40 per cent of their grants, by volume of
application, went to voluntary sector bodies with incomes of less
than £20,000.[13]

12. The Charities Board had commissioned NOP to do
a detailed survey of all their applicants, and this had shown
that the majority of applicants, whether large or small, found
the application forms manageable. But it was undoubtedly true
that there was potentially a barrier, both in the application
form and in the grant management, and the Board were looking to
see whether there was scope for improvements. It was a question
of getting the balance right. The simpler and easier they made
it, the less rigorous and effective their control framework.[14]

13. The Board added that under their community involvement
programme they were prepared to fund capacity building infrastructure
to enable small groups to get the training, the skills or sometimes
the equipment which would make them more effective. They had run
a pilot scheme in Barnsley. They would be very willing to look
at capacity building grants for bodies which could in turn help
the smaller local groups who were having difficulty putting bids
together. The level of resources they could commit had been one
of the restraints on being able to help organisations in deprived
communities apply for grants. They were spending about eight per
cent of their total income on overheads and administration, and
each pound spent on overheads was one pound less on grants. However,
if they worked efficiently they should be able to release sufficient
resources for help and support work and keep within a ten per
cent ceiling.[15]

Conclusions

14. Some of the most deprived areas have yet to see
the full benefit of lottery money. The National Lottery Act 1998
gave lottery distributors new responsibilities and powers to address
this issue, for example by soliciting grant applications, and
the Charities Board should take full advantage of this change.
The examples they gave of their work to target areas of need in
Wales and Glasgow are encouraging signs that they are moving in
the right direction.

15. The Charities Board do not consult local authorities
about individual grant applications because they are properly
concerned about the added bureaucracy and the perceived threat
to the independence of the grant approval process. They have tried
approaches such as joint seminars, and are in discussion with
authorities in Scotland about a more strategic way of working.
But although they have now been making grants for nearly five
years, they have yet to develop a clear system of working with
local authorities to make sure that lottery funds reach the neediest
areas. The Charities Board should give priority to finding ways
of capitalising on the knowledge and expertise of local authorities.

16. The people who most need help from the Charities
Board can be those least able to seek it. The Board are prepared
to provide practical support to help smaller groups prepare bids,
but their NOP survey has confirmed that their processes are a
potential barrier. The Board should take steps to make their application
and monitoring processes less onerous for applicants, while maintaining
an appropriate degree of control.

Figure 2: The extent to which the planned level
of service or activity was being provided as at November 1999

Assessment of progress

Number of projects

Percentage of projects

Value of projects

Value of projects
as a percentage of total

(a)

(b)

(a)

(b)

(a)

(b)

(a)

(b)

Fully provided

91

(77)

61%

(51%)

£11.1m

(£8.5m)

55%

(43%)

Mostly provided

31

(24)

21%

(16%)

£4.3m

(£3.3m)

22%

(17%)

Partly provided

23

(29)

15%

(19%)

£3.9m

(£4.7m)

19%

(23%)

Not provided

2

(6)

1%

(4%)

£0.3m

(£1.7m)

2%

(8%)

Not provided, no grant paid

3

(4)

2%

(3%)

£0.4m

(£0.6m)

2%

(3%)

Not known

0

(10)

0%

(7%)

0

(£1.2m)

0%

(6%)

Total

150

(150)

100

(100%)

£20m

(£20m)

100

(100%)

(a)figures in bold show the November 1999 assessment

(b)figures in brackets show the earlier assessment
(October 1998 to March 1999)

Source: C&AG's report, Figure 5

18. Asked why almost a fifth of the projects examined
had not progressed as planned the Charities Board told us that
in three cases they had not paid out any grant, so no public money
was at risk, and in nine of the remaining 25 cases there had been
a definite improvement in performance and delivery.[18]
We asked about the current position on one project where £16,000
had been used to pay off debts to the Inland Revenue. The Board
replied that they had now sought repayment of the £16,000
plus £6,000 for further expenditure where they were not satisfied
that the money had been spent on the purposes of the grant. They
had also withdrawn £30,000 of the grant.[19]

19. Commenting on the lessons learned, the Charities
Board said that property grants had been a particular area of
concern.[20]
The Comptroller and Auditor General had shown that projects which
involved the acquisition or refurbishment of premises presented
special risks. There were three key factors: difficulty in obtaining
planning permission and resolving tenancy issues; the availability
of suitable premises; and estimating the cost of work to be carried
out. The report had also shown that applicants did not always
provide reliable estimates of the number of people expected to
benefit from projects.[21]

20. The Charities Board told us that they had now
introduced a new two-stage approach to property grants. In no
case had they actually paid out grant before planning permission
had been obtained, but under the new two-stage system they now
offered approval in principle, and made the formal offer of grant
only when the applicant had done a feasibility study or identified
premises. They also required firm estimates from qualified professionals
before grants were put in place.[22]

21. We asked the Charities Board whether they had
encountered much evidence of fraud. The details they subsequently
provided indicated that there had been ten cases of suspected
fraud, which accounted for 0.023 per cent of their total expenditure.
Figure 3 provides a financial summary of the ten cases. In two
cases those who had obtained a grant had been sent to prison and
in other cases the money had been clawed back.[23]
The Board's own grants officers, who are responsible for assessing
grant applications and monitoring projects, had identified a need
for training in fraud detection, and the Board had presented a
fraud awareness course to all their staff.[24]

Figure 3: Summary of ten cases of suspected
fraud

Total value of the grants awarded

Fraudulent element of the grants awarded

Recovered grant

Unrecovered loss of grant

£314,369

£85,642

£31,812

£53,830

Source: Supplementary Evidence

Conclusions

22. Analysis of a representative sample of 150 projects
from the Charities Board's first three grants programmes shows
that over 80 per cent were fully or mostly delivering the level
of service set out in the original grant application, albeit later
than planned in some cases.

23. The scale of the Charities Board's grant giving
means that any shortfall in performance puts very large sums of
money at risk. Out of grant awards totalling £460 million
over the first three grants programmes, between £65 million
and £145 million could have been given to projects which
were not delivering the intended level of service or activity
at the time of the National Audit Office examination. The Charities
Board have assured us that they have followed up the specific
cases identified by the National Audit Office as not having progressed
as planned, and in one case they have withheld grant of £30,000
and sought repayment of a further £22,000.

24. The difficulties experienced on some projects
appear to reflect the special risks involved in the acquisition
or refurbishment of premises; and not all projects have been approved
on the basis of realistic estimates of the costs or the likely
number of beneficiaries. The Charities Board have now taken steps
to address these issues, including the introduction of a new two-stage
approval process for capital projects. It is important, however,
that they identify the risks to all projects at the grant application
stage, and take account of the risks in their subsequent grant
monitoring. Drawing on the analysis already undertaken by the
National Audit Office, the Charities Board should identify the
key risk and success factors on the projects they have funded
to date to ensure that they are not overlooked in considering
future applications.

25. The Charities Board are aware of ten cases of
suspected fraud, and several factors underline the need for the
Board to be vigilant in this area. There is the sheer volume and
value of grants awarded by the Board, and the likelihood that
some applicants have limited experience of managing projects and
operating financial control systems. It is important therefore
that the Board see through their programme of fraud awareness
training for their grants officers.

27. The Charities Board acknowledged that there had
been unfortunate and in some cases long delays, but said that
they had got the reports in the end. They had significantly stiffened
their procedures, and for the end of grant report grants officers
had now been instructed to make three telephone calls and then
to send a letter if there had still not been a reply. If that
failed the grant recipient would be sent a letter by lawyers saying
that they were in breach of terms and conditions and that unless
they sent the report, the Board would sue for the return of the
grant on the ground of non-fulfilment.[26]

28. The other main element of the Charities Board's
monitoring is to visit projects. The Comptroller and Auditor General
reported that all projects awarded £200,000 or more are visited
and below this threshold a random sample of five per cent of projects.
Some 30 of the 35 grants officers consulted by the National Audit
Office considered that decisions about which projects to visit
should be based on an assessment of the risk associated with each
project. The size of the grant might be one aspect, but from their
experience of managing projects grants officers identified other
indicators of risk. These included:

organisations where management is weak or lacking
in experience;

small organisations, particularly those in receipt
of large grants;

capital projects;

organisations that have asked for numerous grant
variations;

innovative projects; and

projects involving revenue funding of several
different activities.

The Board had commissioned a comprehensive analysis
of indicators of risk and were piloting a risk assessment system
which would categorise grants as high risk, medium risk, or low
risk and enable them to focus their grant management and monitoring
accordingly.[27]

29. The timing of project visits will influence their
impact. Of the 150 projects examined, 45 had received a grant
over the threshold for an automatic visit and the Charities Board
had visited 30 of these. Of the other 15 projects, 12 had either
not started or were less than half way through their period of
funding, but two projects were nearing completion and a third
was causing particular concern for the Charities Board. In this
case they did not know where £18,000 of the grant had gone.
This project was one of those the National Audit Office identified
as not progressing as planned.[28]
The Charities Board told us that they had paid a number of visits
to the project but had been unable to see anyone. They had now
written to them saying that unless they received comprehensive
documentation they would instruct lawyers to start proceedings.[29]

30. Each offer of grant by the Charities Board includes
standard terms and conditions with which the grant recipient must
comply. For 136 projects (91 per cent) of the 150 projects examined
terms and conditions had been complied with. In the remaining
14 cases information required by the Board had not been provided,
and four were among those not providing the planned level of service
or activity. The kind of information not provided included audited
accounts and quotations for capital purchases.[30]
The Charities Board acknowledged that there had been less than
fully satisfactory control. In eight cases they had paid out grant
without being given the full quotations from the architects or
the contractors, although in six of those cases the service had
been fully provided and they had obtained the documentation later.
They told us that they had tightened their procedures since the
first three grant rounds and did not pay out money unless they
had certificated bills.[31]

31. Where the Charities Board have identified unresolved
risks, they attach special conditions to the grant and this had
been done for 79 of the 150 projects examined. In 63 cases the
conditions had been complied with, but in the remaining 16 cases,
with grant awards totalling £1.6 million, there was nothing
in the Board's records to indicate compliance. In one case, the
Board were particularly concerned about the lack of detailed planning
and preparation, and attached four special conditions to the offer
of grant. They did not receive the information they required but
they continued paying out the grant of £95,000.[32]
They accepted that they had paid money out without rigorous enforcement
of the initial special conditions, but added that the project
was now fully operational and had produced the benefits of the
grant. [33]

32. The Financial Directions issued by the Department
require the Charities Board to obtain assurance that assets purchased
with lottery funds are being used for the purposes intended. The
grant recipient may not dispose of those assets without the prior
permission of the Board. If any assets are sold, the Board can
reclaim that part of the grant which was used to acquire the assets.[34]
We asked the Board what gave them the right to recovery if disposal
did take place,[35]
and they informed us that their position was protected through
the grant contract, in the form of the grant offer letter and
the standard terms and conditions of grant. Their legal advice
was that they were adequately protected by the firm requirement
that the assets could not be sold without their written permission.
They would normally seek an appropriate share of the market value
from such disposals, although cases would be judged on the particular
circumstances arising at the time.[36]

33. We asked the Charities Board why, given the Financial
Directions, they did not have a consolidated register of capital
assets funded by them, and formal procedures to verify the existence
and use of assets. They told us that they were producing a consolidated
asset register which would be available in autumn 2000, and that
they proposed to carry out periodic visits to projects.[37]
As they had started funding projects in 1995 we put it to the
Board that they should have given greater priority to this aspect
of their responsibilities. They told us that the sheer scale of
the information required meant it had not been possible to produce
the comprehensive register earlier.[38]

34. We asked the Charities Board whether, once they
had their computerised register, they thought they would discover
cases where they might have a right of recovery of which they
had not been aware. They said that the computer system would not
discover the cases, but would automatically prompt grant staff
to undertake inspection visits or other investigations. They considered
it unlikely that they would discover cases where they had a right
of recovery. The type of groups that they funded were not on the
whole ones who sought to gain commercial advantage from the capital
assets that had been funded. Their experience so far had been
that the voluntary sector was anxious to hang on to and to use
the capital assets for its beneficiaries rather than wanting to
sell them off.[39]

35. The Financial Directions also require the Charities
Board to establish a policy for evaluating their projects, and
state that where analysis of individual projects may be impracticable,
programmes of grants should be evaluated. The Board's policy is
to evaluate the impact of their funding at the overall programme
level, but they have not yet sought to evaluate grants programmes
as a whole.[40]
They told us that since publication of the Comptroller and Auditor
General's report they had commissioned a full report on north
east community buildings, and commissioned research on black and
ethnic minority projects in Birmingham, spatial targeting in Barnsley,
refugee grants in London, advice services in Northern Ireland
and the first grants on poverty in Scotland. Their research committee
was looking at a comprehensive set of proposals for further evaluation.[41]

36. The Charities Board's monitoring arrangements
have evolved over the period that they have been making grants.
They told us that their permanent staff had risen from 43 to 250
trained grants officers. There were some clear lessons to be learned
from the Comptroller and Auditor General's report, and they had
introduced a comprehensive grant management manual, extended and
improved the training of their grants staff, tightened up the
rules for chasing the end of grant reports, and introduced their
new two-stage approach on property grants.[42]

37. The Financial Directions issued by the Department
set out the broad framework of financial and management controls
within which the Charities Board must operate.[43]
Asked what they had done to ensure that these Directions were
observed, the Department told us that at the outset they had approved
the Board's systems and procedures, and that they did an annual
assurance check on the systems, including work by internal audit.
They had been discussing with all the lottery distributing bodies
the lessons emerging from their own experience and the two previous
reports on lottery distribution from the Committee of Public Accounts
and the National Audit Office.[44]

Conclusions

38. The Charities Board's arrangements for monitoring
how lottery grants are used have not taken account of all the
risks associated with projects; their visits to projects have
not always been timely; and the key self-assessment reports from
grant recipients are often late - sometimes a year late and more.
The Board are now adopting a more robust line with those grant
recipients who are late providing self-assessments, and are now
piloting a risk assessment system. A risk based system is important
both for effective grant management and monitoring, and in making
the most efficient use of the Charities Board's own staff resources.

39. The Charities Board have attached terms and conditions
to grants but then failed to ensure that grant recipients meet
them. The special conditions set by the Board in some cases are
there to ensure that risks which might compromise the project
are addressed early on, yet in one case the Board paid out the
full grant of £95,000 without the special conditions being
met. The Board need to be more robust in their enforcement of
grant conditions in future.

40. The Charities Board's monitoring arrangements
have been evolving over time, and have now reached the point where
they are fully staffed. Nevertheless, in the five years since
the Board started making grants, they have been slow to meet those
aspects of the Financial Directions set by the Department which
require them to monitor the use of assets beyond the period of
grant and to evaluate their grants programmes. The Board spend
large amounts of money on supporting good causes (over £1.5
billion already), and it is essential that they learn from experience
and apply the lessons to their future activities.